Wednesday, June 22, 2011

The Value Of A Study

But after reading a post in which Pat wrote (in the comments):
...
I realized these guys weren't just [ideologues]. It's easy to recognize nonsense coming from the other side. When you recognize it from your own, you're a thinker.

Which, for a blogger, is something that's always good to keep in mind.

The other day, I noted that the McKinsey And Company report on management attitudes about health insurance for their employees wasn't a terribly useful source of information, thanks to the fact that McKinsey had not disclosed the method they used to conduct the poll. I also wrote that I'd been tempted to believe its supposed conclusions, based on my own views. That this was a poll, however, seemed obvious from the descriptions. I suspected it was of rather limited value as a result, as Paul Krugman explained yesterday:

So what do we learn? It was basically a poll — which is a really bad way to assess how firms will make decisions about whether or not to maintain health coverage. Such a decision is, after all, a big issue, one that won’t be taken without careful study of the numbers and consequences. A relatively casual answer to a poll probably isn’t a very good predictor of that decision.

Yesterday, McKinsey released that information, as Krugman notes. Here is an interesting quote from the introduction, to which I've added emphasis in a key passage:

The survey was not intended as a predictive economic analysis of the impact of the Affordable Care Act. Rather, it captured the attitudes of employers and provided an understanding of the factors that could influence decision making related to employee health benefits.

As such, our survey results are not comparable to the healthcare research and analysis conducted by others such as the Congressional Budget Office, RAND and the Urban Institute. Each of those studies employed economic modeling, not opinion surveys, and focused on the impact of healthcare reform on individuals, not employer attitudes.

I didn't check what the RAND Corporation did, but the CBO and the Urban Institute both use economic models, at least partially, to justify their conclusions. RAND being the place that it is, I'd expect its predictions were based on lots of such analysis, too.

I'm not sure what the McKinsey report summary means by "predictive", though. I understand the word, but it seems to be used here in a way that is more designed to get McKinsey out of trouble than to explain something. What I get from the fact that it is a poll is that it can't be used to say accurately that X percent of companies that now carry health insurance for their employees will dump it starting in 2014. It can't be that precise.

What it does, however, is tell us something that's very important, and this is something that Prof. Krugman fails to note. What it's telling us is, if economic conditions are more or less the same as the CBO and others assumed, that there will almost certainly be more companies dropping health coverage than those other "predictive" estimates say.

Despite Krugman's assertion, management decisions are not made solely on the basis of some scientific analysis of the economic situation of the company. They are, to a great degree, value judgments. By "value judgments", I do not mean that they are sentimental. What I mean is that they are a product of managements' view of where the company is going, the relative value of its employees, its stock price, and its market, and other concerns that I might term "fashion", in other words, the management trend of the day. Businesses, particularly smaller ones or those that are engaged in manufacturing, that have employees who have developed either skills or professional knowledge that makes them more effective will tend to value their employees more highly. Retailers, on the other hand, are likely to be mostly about their markets.

Plus, as Krugman and others have noted, chief executive officers (CEOs) and other top management are becoming more important in the decision making processes of companies, thanks to the inflated value those companies put on their services. That makes decisions like this more subject to whim and intuition, not less.

What the McKinsey report is telling us is something that most American workers will not be surprised to hear, which is that if there's any doubt about the economics, the management will come down on the side of boning the workers and giving themselves celebratory bonuses.

Of course, anyone who has read my attitude about economics and economists (not to mention the mainstream press's coverage of economics) should recognize that I view economic modeling much more skeptically than Prof. Krugman. Such models are only as good as the assumptions they make, and the verification applied to those models. Plus, any report from a respected institution like the CBO or RAND is likely to affect decisions of business leaders and politicians, which in turn has an effect of its own on the economy. If, for instance, the CBO, et al, had predicted that no company would drop its health insurance based on changes mandated by the Affordable Care Act (ACA), then I feel reasonably sure that some companies would not have bothered to think much about them. Even rather good economists seem to forget that human beings often do not make decisions based on economic principles.

This is not good news for anyone who thinks the ACA is a good idea, because it's a clear sign that things will not be even as good as what the CBO and others predicted, which wasn't all that great. It was predicted that somewhere in the neighborhood of fifteen million workers would lose their employer-provided health insurance. The McKinsey report tells us it will probably be more.

One has to wonder if Paul Krugman looked at this report with a bit of skepticism for his own views.